A legislative audit released Tuesday suggests the state may have been shortchanged millions of dollars because of the lax way it has taxed EnergySolutions. The audit also raises questions about whether Tooele County has been getting its full measure of mitigation fees from the company.

In response to a question from Rep. David Litvack, D-Salt Lake City, legislative auditors testified that concerns about the state’s radioactive waste taxes, which are based upon gross receipts, also apply to Tooele County’s mitigation fees, which are also based on gross receipts.

EnergySolutions uses of a business model called “vertical integration” that has auditors and legislative leaders concerned the state’s radioactive waste taxes and the mitigation fees received by Tooele County may not be commensurate with the value of waste being disposed of at the company’s Clive facility.

“One of the questions we wanted answers to was is the radioactive waste tax maximizing benefits for Utah citizens?” said Sen. Michael Waddoups, R-Taylorsville. “Based on the information in this audit, we are not. It is time for us to look at this again.”

The report, completed by the Office of the Legislative Auditor General, concluded that current methods for calculating the radioactive waste tax give EnergySolutions the opportunity to manipulate the amount of tax the company pays. While stressing that EnergySolutions has not violated the law or acted with the intent to avoid taxes, the audit recommends the Legislature change the tax structure to reduce the risk that the state may be shortchanged on taxes in the future.The audit was critical of two aspects of the way the company is taxed currently. First, EnergySolutions is taxed 5 percent on gross receipts for unprocessed waste received at Clive and 10 percent for processed waste. The Legislature set the higher rate for processed waste because processing reduces the volume of the waste. Since EnergySolutions charges by volume, the processed waste yields less income, hence the higher tax.

This arrangement allows EnergySolutions to choose to receive unprocessed waste at Clive and avoid paying the higher tax.

Second, when the tax structure was set up, EnergySolutions mainly accepted waste directly from the generators of that waste. Those companies paid EnergySolutions a volume-based fee negotiated as a business-to-business transaction. However, since EnergySolutions acquired its own waste processing facility in Oak Ridge, Tenn., the company has been shipping waste from there to Clive — effectively charging themselves a fee they arbitrarily decided upon. While not quantifying the difference in the free-market and internally set fees, state auditors reported the internal price EnergySolutions charges itself for waste received at Clive is significantly less than the price it charges outside customers.

Those lower prices mean lower reported gross receipts. The company pays taxes to the state based on those receipts.

EnergySolutions officials told auditors the lower price for internal waste amounted to a volume discount, a practice the auditors said does not violate law.

“EnergySolutions fully complies with all tax laws,” said Mark Walker, EnergySolutions vice president of marketing and media relationships.

However, Matt Pacenza, policy director for Healthy Environment Alliance of Utah, said the lower price on internal waste was really an attempt by the company to reduce its tax bill.

“Why else would they be charging themselves a lower price if not to lower taxes?” asked Pacenza.

Mitigation fees paid to Tooele County by EnergySolutions are also based on gross receipts, with lower receipts resulting in lower mitigation fees. Mitigation fees, which have been used to fund county government operations, have generally declined in recent years from a peak of $13.3 million in 2005 to only $2.5 million through the first eight months of this year. The decline in those fees this year has been one reason why county commissioners have had to lay off employees and make other drastic cuts in the county budget.

Legislative auditors recommended the state implement either a straight tax based on total radiation accepted at Clive, or a hybrid tax that combines total radiation and waste volume.

“The assumption in the report is that a curie-based tax would generate more revenue for the state,” EnergySolutions officials wrote in response to the audit. “Of course, this can only be true if the net result is a tax increase.”

But a tax increase could result in EnergySolutions losing business to its competitors and contribute to a decline in revenue and employment for Utah and Tooele County, according to Walker.

“The belief that EnergySolutions takes 97 percent of the country’s low-level radioactive waste is incorrect,” said Walker. “The commercial and government waste markets are competitive in nature. The Clive facility competes with other facilities for waste.”

The recent audit of the way radioactive waste is taxed echoes similar issues debated within Tooele County six years ago.

In September 2006, the Tooele County Commission passed an ordinance requiring an independent audit of EnergySolutions’ revenue stream to verify that mitigation fees were appropriately set. At the Tooele County Republican Party Convention in April of that year, the two county commissioners who had favored that independent audit — Matt Lawrence and Dennis Rockwell — were replaced by two candidates — current commissioners Bruce Clegg and Jerry Hurst — who did not favor the audit.

When Hurst and Clegg took office, the independent audit was scrapped on grounds it was redundant with audits the state performs.

Lawrence, who supported the audit during his time as commissioner, said it was a matter of sound business practices.

“It’s not that we did not trust EnergySolutions or had any reason to suspect them of anything,” said Lawrence. “It just is good practice that if you have a tax based on gross receipts that an independent party should look at how that amount is derived. All we wanted was to make sure that the county was getting what the tax called for. We weren’t looking to get anything that the law didn’t allow us to collect.”

The audit, which was done in 2007, cost the county $24,442 and did not turn up any unpaid taxes, according Mike Jensen, Tooele County auditor.

“It was a lot of money for little return,” said Jensen. “That’s why I opposed the audit.”

The future of the radioactive waste tax is now in the hands of the state Legislature.

“The ultimate decision will be made by the Legislature,” said Walker. “We have and will continue to comply with all state laws.”

A separate performance audit of the Division of Radiation Control released on Tuesday by the Office of the Legislative Auditor General criticized the division’s dependence on self-reporting of violations by EnergySolutions and called for tighter controls including physical verification of waste classification to make sure banned waste doesn’t make its way into Utah.

“There is no accountability for EnergySolutions,” said Christopher Thomas, HEAL Utah Executive Director. “The system is broken, and it’s the Utah public who is paying the price.”

Tim covers education, Tooele City government, business, real estate, politics and the state Legislature. He became a journalist after a long career as an executive with the Boy Scouts of America. Tim is a native of Washington state and a graduate of Central Washington University.

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